Accounting Kieso ch 3

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Accounting Cycle (10)

• Identifying and recording

• Journalizing

• Posting

• Trial balance

• Adjusting entries

• Adjusted trial balance

• Preparing financial statements

• Closing

• Post-closing trial balance

• Reversing entries

EVENT.

A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Events may be external or internal.

TRANSACTION.

An external event involving a transfer or exchange between two or more entities.

ACCOUNT.

A systematic arrangement that shows the effect of transactions and other events on a speciﬁc element (asset, liability, and so on). Companies keep a separate account for each asset, liability, revenue, and expense, and for capital (owners’ equity). Because the format of an account often resembles the letter T, it is sometimes referred to as a T-account . (See Illustration 3-3, page 87.)

REAL AND NOMINAL ACCOUNTS.

Real (permanent) accounts are asset, liability, and equity accounts; they appear on the balance sheet. Nominal (temporary) accounts are revenue, expense, and dividend accounts; except for dividends, they appear on the income statement. Companies periodically close nominal accounts; they do not close real accounts.

LEDGER.

The book (or computer printouts) containing the accounts. A general ledger is a collection of all the asset, liability, owners’ equity, revenue, and expense accounts. A subsid-iary ledger contains the details related to a given general ledger account.

JOURNAL.

The “book of original entry” where the company initially records transactions and selected other events. Various amounts are transferred from the book of original entry, the journal, to the ledger. Entering transaction data in the journal is known as journalizing .

POSTING.

The process of transferring the essential facts and ﬁgures from the book of orig-inal entry to the ledger accounts.

TRIAL BALANCE.

The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called an adjusted trial balance . A trial balance taken immediately after closing entries have been posted is called a post-closing (or after-closing ) trial balance . Companies may prepare a trial balance at any time.

ADJUSTING ENTRIES.

Entries made at the end of an accounting period to bring all ac-counts up to date on an accrual basis, so that the company can prepare correct ﬁnancial statements.

FINANCIAL STATEMENTS

Statements that reﬂect the collection, tabulation, and ﬁnal summarization of the accounting data. Four statements are involved.

FINANCIAL STATEMENTS (4)

(1) The balance sheet

shows the ﬁnancial condition of the enterprise at the end of a period.

(2) The income state-ment measures the results of operations during the period.

(3) The statement of cash ﬂows reports the cash provided and used by operating, investing, and ﬁnancing activities during the period.

(4) The statement of retained earnings reconciles the balance of the retained earnings account from the beginning to the end of the period.

CLOSING ENTRIES.

The formal process by which the enterprise reduces all nominal ac-counts to zero and determines and transfers the net income or net loss to an owners’ equity account. Also known as “closing the ledger,” “closing the books,” or merely “closing.”